Dec 06, 2017

Make America Competitive with Lower Rates, Not a New Consumer Tax

Post by Freedom Partners

One of the key principles of tax reform that Freedom Partners has been advocating early-on in the debate is that it should not impose any new burdens on taxpayers. Throughout the summer, the “burden” under consideration was the border adjustment tax (BAT). It would have imposed a 20-percent tax on all imports, which amounted to a tax hike on consumers of approximately $1.2 trillion.

The BAT would have increased costs on virtually everything and undermined the very reason Congress was doing tax reform in the first place – to provide relief for taxpayers and jumpstart the economy. Thankfully, the Senate made clear that the BAT would be dead on arrival and the “Big Six” excluded it from the unified framework that was released in September.

But this is Washington, and bad ideas don’t die that easily.

Buried in the House tax reform package is a 20-percent excise tax on U.S. and multinational companies that purchase goods from related foreign entities. The tax would apply to “cost of goods sold”, meaning everything from clothes to electronics, and it would be passed on to consumers just as the BAT would have been.

The excuse the House gives for continuing to stick new taxes in the tax reform package is that they think it will address “base erosion.” Base erosion is what it’s called when companies shift profits overseas in order to avoid paying the full U.S. tax rate. But the way to address this problem isn’t by inventing new taxes, it’s by fixing what’s driving companies overseas to begin with – our uncompetitive corporate tax rate of 35-percent.

Don’t take our word for it. Here’s what the tax counsel for the Senate Finance Committee said to Bloomberg BNA about how significantly lowering tax rates could deal with base erosion:

Tony Coughlan, tax counsel for the Senate Finance Committee, said he has seen several base erosion-related proposals as part of the mix for tax reform, as the GOP border-adjusted tax plan appears to have fallen out of favor. … He also said some advocated focusing on a cut in the corporate rate, which is currently 35 percent. “If we got it down from 35 to 15, you’re done,” he said. “Don’t worry about base erosion. Nobody’s going to be eroding out of the base, at least not nearly enough. So that’s one stream of thought.”

To their credit, both the House and the Senate take major steps towards eliminating the incentive for companies to locate overseas by taking the corporate rate all the way down to 20-percent, which is below the global average. Better yet, the Senate version of the bill didn’t include this harmful 20-percent consumer tax.

Considering the outcry against the BAT from a number of prominent Senators, it shouldn’t be surprising that they decided to leave the House’s BAT 2.0 on the shelf. As the conferees in the Senate and House work to reconcile the two bills, we’re hopeful it stays there.

The margin of error in the Senate is one vote. A 20-percent tax on consumers has already been rejected in the Senate, it would violate the unified framework, it would undermine the economic benefits of reform, and it would amount to a major political obstacle at the most crucial moment.

We urge the conferees to stick to the principles of the unified framework and deliver on the promise of pro-growth tax reform. Make America more competitive by lowering rates as low as they can go – not by imposing new taxes.

The best path forward is to take the Senate version of the bill, add in positive provisions from the House bill such as repealing corporate welfare loopholes and the Alternative Minimum Tax for individuals and corporations, and get it to the president’s desk to be signed.